Towards Financial Freedom
Plantation - Inventory Uptick Will Not Last
We are optimistic that the increase in Malaysia's palm oil inventory will not be sustainable. We believe that March's higher production - which benefitted from a spillover from February - will not be repeated in April,while exports should pick up again due to a pullback in palm oil prices and a wider discount to soybean oil. Maintain bullish on the sector, with expectations of further price strengthening in 2Q.
- Production surged in March. Malaysia's palm oil production rose 17.1% m-o-m to 1.497m tonnes in March, thanks to a spillover production from February. Note that there was barely any rainfall in February, resulting in fruits not being able to ripen. With the arrival of rain in March, fruits originally due to be harvested in F ebruary were harvested in March. As this phenomenon will not be repeated, we expect April production to fall m-o-m to 1.4m tonnes or lower.
- Exports to recover. Exports declined in March as prices rallied to a high of MYR2,922 per tonne, based on West Malaysia physical price. Prices have since retreated, which will help exports. The discount to soybean oil has also widened to USD120 per tonne vs under USD60 in March, as the soybean oil price has been climbing.
- Inventory to decline further. We believe there is still room for palm oil inventory to fall further, as production normalises downwards in April and the negative impact from last year's dry weather kicks in 2Q. Exports should also improve as mentioned above. Given the production issue, this year's inventory upcycle will likely be extremely sluggish.
- Outlook still very positive. We remain very bullish on the sector as sector valuation is still undemanding, while palm oil prices should strengthen further in 2Q and 3Q, as the adverse impact on production from the dry weather last year becomes evident. We also expect to see on-the-ground evidence of El Nino in the not-too-distant future, as the Southern Oscillation Index has been sustaining deep negative readings.
- Top BUYs. We continue to like First Resources, Astra Agro Lestari, IOI Corp, Bumitama Agri, Sarawak Oil Palms and Jaya Tiasa.
Source: OSK-DMG
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